Hallmark Financial Services, a specialty property/casualty company, announced Thursday that it is exploring the separation of its specialty commercial business to unlock its value and improve access to capital.
Currently the company is comprised of three business segments—specialty commercial, standard commercial and personal.
The specialty commercial segment represented 75 percent of the company’s gross premium written ( 68 percent of net premium written), through the first nine months of 2020. The segment’s diversified portfolio of products is placed almost exclusively through wholesale brokers, with the vast majority written on an excess and surplus lines basis.
An initial evaluation of the potential separate by Hallmark Financial’s board of directors indicates that the action could unlock significant value by segregating the operational structures of its segments.
Each segment currently operates under a unique business model, utilizes its own distribution channels and has a different return profile. The board believes that establishing two separate companies may achieve a more appropriate aggregate valuation and improve access to capital.
The news comes just over a week after board of directors appointed Executive Chair Mark E. Schwarz to take on the roles of president and chief executive officer, filling a role vacated by Naveen Anand, who submitted his resignation on Jan. 11, 2021, citing family and personal reasons. Schwarz previously served as CEO from January 2003 through August 2006, and as president from November 2003 through March 2006 became executive chairman in August 2006.
Last year was a difficult year for the company. After announcing its exit from binding primary commercial auto business in March 2020, the company received several delinquent filing notices from NASDAQ in subsequent. After filing the 2019 annual financial results, which were unfavorably impacted by prior-year development in late June, NASDAQ’s rule compliance matter was closed in July.
In September, Hallmark Financial announced that the chief financial officer, Jeff Passmore, had submitted his resignation.
In November, the company reported that third-quarter results were impacted by the cost of a loss portfolio transfer ($21.7 million pre-tax) and more adverse prior-year reserve development ($13.9 million pre-tax), mainly coming from commercial auto business. On the bottom line, the third-quarter loss came in at $28 million, and through nine months it was $85.6 million, compared to $33.3 million profit for the first nine months of 2019.
The board and executive management team are working on the commercial specialty separation with assistance from its financial, business and legal advisors Raymond James & Associates, Inc., Willis Re Inc., Olshan Frome Wolosky LLP and McGuire, Craddock & Strother, P.C.. Together they will evaluate the company’s current structure and the strategic, operational, capital and tax implications of the potential separation.
Additionally, the board has engaged the executive search firm Reilly Partners, Inc. of Chicago to identify qualified candidates to serve as the CEO of a standalone specialty commercial company.